20180903-中国银河国际证券-格力电器-000651.SZ-Potential_slowdown_in_2H18_6页_439kb

Gree [000651.CH]: Potential Slowdown in 2H18 Summary

Core Content

Gree (000651.CH) reported strong interim results for 1H18, with revenue and EPS growth of 31.4% and 34.2% respectively, driven by robust performance in the air conditioning (AC) segment. However, concerns are rising about potential slowdowns in 2H18 due to a deceleration in AC sales growth in July and August, attributed to a high base effect and adverse weather conditions. Despite the strong top-line growth, the company's gross margins in the AC segment contracted by 410 basis points due to rising raw material costs and low factory utilization. Gree managed to offset some of this margin pressure by reducing selling expenses by 350 basis points to 8.7%, a historical low, though this strategy may not be sustainable.

Main Points

• Strong 1H18 Performance:

  • Revenue increased by 31.4% YoY.
  • EPS grew by 34.2% YoY.
  • AC segment contributed ~80% of total sales, with 38.8% YoY growth.
  • Sales growth was more pronounced in Tier 3/4 cities.

• Margin Compression:

  • Gross margin in the AC segment dropped to 30.8% from 32.8%.
  • Selling and distribution costs rose by 11.0% YoY.
  • Overall net profit margin remained stable at 14.0% in 1H18.

• AC Growth Concerns in 2H18:

  • AC sales growth slowed in July and August due to high base and weather effects.
  • Growth moderated to flat in August.
  • This trend aligns with channel checks and reports from other home appliance manufacturers.

• Dividend Disappointment:

  • Gree announced a proposed interim dividend of RMB3.6bn, reflecting ~30% payout ratio for 1H18.
  • This is below market and historical expectations (~50–70% payout ratio).
  • No clear guidance on delayed dividend for 2017 earnings or use of cash reserves.

• Inventory Levels:

  • Both Gree's factory and channel inventories remain seasonally low.
  • Competitors also maintain well-controlled inventory levels.

• Valuation and Target Price:

  • The stock is valued at 9.5x PER, implying a 12-month target price of RMB42.6, or ~9% upside.
  • The analyst remains cautious due to low visibility on AC sales, lack of new long-term growth drivers, and inconsistent corporate strategy.
  • Gree derives ~88% of its revenue from the China market, making its earnings heavily dependent on domestic performance.

Key Financial Highlights

Investment Outlook

• Rating: HOLD
• Target Price: RMB 42.6 (+9% upside)
• Market Cap: US$34,204m
• Shares Outstanding: 6,016m
• Free Float: 56%
• 52W High: RMB 58.70
• 52W Low: RMB 36.42
• 3M Avg Daily T/O: US$39m
• Major Shareholders: Gree Group (18%)

Conclusion

While Gree has demonstrated strong performance in 1H18, the potential slowdown in 2H18 due to AC sales concerns and margin pressures is a key risk factor. The company's heavy reliance on the Chinese market and the lack of clear long-term growth strategies have led to a cautious outlook. Despite the current low valuation, the analyst maintains a HOLD rating due to the uncertainty surrounding the second half of 2018.